I am a financial planner and I do some work with insurance as well as investments. As I have been doing this a long time I have seen breadwinners die in families at a young age, the insurance money that comes in does a lot more than give some peace of mind. It saves families from financial ruin.
I’m glad things have worked out for you. Our kids are grown, but my wife and I both work, and we have always carried life insurance for the other to replace our income if one of us dies. We don’t have to do it, but the money would make a big difference if one of us was not here. It would provide options at a difficult time. That’s what life insurance is, a contract for money when it is needed.
I am not saying this is you, but I have also seen clients who could care less what happened to their spouse if they were not around. They say their spouse could get a job, with no real thought to if that would be possible at a later age. Once I know that no skin off my back, the conversation is over.
Ok, how whole life and permanent life insurance works, not the Primarica version.
To start, I believe in term. I believe that most people should buy term and max out a retirement investment vehicle of their choice. (Probably a Roth of some sort, but you do you I don’t give investment advice).
That said, to say that the problem with whole life is that you don’t get the cash is missing the point.Whole life is not an investment vehicle, though it does build cash value and is a countable asset in the way that term insurance is not. The intended purpose of traditional whole life is not the investment it’s the death benefit. Are there people who will try to leverage the cash value for other stuff? Yes. They don’t so it with traditional whole life if they are smart, but sure people do that. I’m not going to argue the merits of that here because no one ethical is doing that with anyone over the age of 55. The cash value is to provide the policy access to the investment that the insurance company is going to use to pay your claims anyway. Fundamentally it provides flexibility so that you aren’t simply stuck paying increasing premiums year after year until you die.
Because if you really want to go minimalist you buy annual renewable term rather than anything with a level premium. Every year you pay more for the insurance because every year your cost of insurance rises. No funny games like on a 20 year term where they massively over charge you for the first half of the policy life so they can undercharge you for the second. With whole life though you know where you stand. You have a 50k policy with 30k of cash value you know you are paying for 20k of insurance. The rest of the death benefits come from your cash. (sort of, not really, but close enough) and thus, even though you are getting older and more and more expensive to insure your premiums stay guaranteed for life. That’s what the cash is for. It guarantees your premiums. Once it accumulates you can actually use it to pay your premiums. These kind of short pay policies can be great if you know you need permanent protection and want to never come close to paying as much in as the policy pays out.
Again, will people do hinky stuff? Sure. Bank of yourself is stupid beyond the telling IMO. But for someone like the person in my last post, whole life makes sense
And if that works for you great. There are many thousands of people, possibly millions, that it doesn’t work for. Judging by the number of funeral requests on go fund me, it’s not working for lots of people’s loved ones either.
Isn’t that what a lot of AIDS patients were doing, and then found themselves in a life-insurance pickle (for want of a better word) when the treatments improved and death was no longer imminent?
You write that a whole life policy “provides flexibility so that you aren’t simply stuck paying increasing premiums year after year until you die.” However, this presumes a person needs life insurance when they are elderly (i.e. so-called "permanent protection) up until the point that they die of old age. Since everyone dies eventually, no company is going to offer a policy whose death benefit is guaranteed to be paid out unless they have already taken in enough money from the person over the years to cover the payout.
Similarly, unless you are working for a charity, no insurance company is going to offer a policy in which the policy holder is likely to “never come close to paying as much in as the policy pays out.”
Going back to term insurance, as I stated upthread, I currently have several term policies. I sincerely hope that I pay out more than I receive and never get the death benefit, because the only way I make out in the financial sense is if I die relatively young. I have no intention of continuing to purchase more and more expensive term policies as I get older and older, nor do I need a whole life policy as an alternative to this.
The bottom line is that whole life, as you describe it here, seems like an elaborate shell game designed to obfuscate the high cost of life insurance for older people.
Here we have left the relm of opinions and are just dealing with facts. You are incorrect. I can run you illustrations.
For you, this is true. Because you have planned. Currently there are 2284170 people on go fund me passing the hat to try to pay for a funeral because they or their loved ones didn’t. And that number is larger literally every time I look it up.
I don’t see how. Whole life is extremely basic and pretty clear and upfront. There are forms of life insurance that I might agree with you on this, including several types of term insurance, but whole life and annual renewable term are about as cut and dry as you get.
NAF1138, what is the cost of insurance in a Whole Life policy and what is the rate of return on the additional deposit that is required to maintain a level premium for life?
I don’t doubt this- but I don’t think the number of go fund me requests tells you anything meaningful. But that has a lot to do with the people I know who have started funds. ( I mean, I’m sorry your kid was in the hospital for six weeks, but that doesn’t mean he needs 20K in bucket list experiences when he recovers and BTW, your husband is a dentist and your household income is probably 3 or 4 x what mine is. You ought to be able to afford a Disney trip without help. But apparently they don’t want to. )
NAF1138, are you seriously saying that insurance companies offer polices in which the insured policyholder is likely to “never come close to paying as much in as the policy pays out.” So in other words, on the average, the insurance company takes a loss on each of these policies? What, do they make it up in volume? :rolleyes:
In your illustrations, are you including the opportunity cost of the premiums paid?
No of course opportunity cost isn’t taken into account. And no interest you might have earned if you kept that money and invested it instead isn’t taken into account. Insurance companies start making profits because they invest the money they earn themselves and not everyone keeps every policy. Term life is their huge profit center in this respect paying out less than 1% of all policies. Again, by design. I’m not against term. It’s just it’s own thing.
But yeah, a policy where you pay 25 dollars a month for 20 years on an 11 year old and that 11 year old has a 100k insurance policy for life. That exists. I’ve seen it recently.
Would you be better off putting 25k into a mutual fund for the kid for 20 years? If you look at this as an investment sure. But that isn’t why most people buy life insurance. They buy it for the guaranteed death benefit. The grandmother who asked for the 100k policy wanted her grandson to never have to worry about life insurance for himself.
If you put $300 per year into a Roth IRA for the kid for 20 years and he earns 8%, he’ll have $100,000 in the account by the time he’s 56. I assume he earns at least $300 from odd jobs to make this legal - there is no minimum age to contribute to a Roth IRA - and 8% is less than I’ve earned on my portfolio over the years. His odds of dying before 56 are pretty low. Starting at 65, he can take out almost $15,000 per year in income from the account until he is at least 89 without ever dropping below $100,000 in assets, assuming the same ROR. His life expectancy at age 65 is only until he is age 83.
$100,000 isn’t nearly enough life insurance for most adults with responsibilities so this policy hardly eliminates all his need for life insurance. What you describe is a thoroughly mediocre deal. Or is that what you meant?
Well then it’s a more than a little disingenuous for you to claim that I am incorrect when I state that “no company is going to offer a policy whose death benefit is guaranteed to be paid out unless they have already taken in enough money from the person over the years to cover the payout.”
But why? Why does an 11 year old need a $100K life insurance policy? For his nonexistent dependents? Because someday he might get dependents? Wouldn’t the grandmother be helping her grandson to a far greater extent by taking the same amount of money and setting up an investment for the kid to help him pay for college, or a house, or even retirement?
Your whole argument for whole life presupposes that everyone needs life insurance over the whole course of their life (hence the term “whole life”). We’re getting back into the realm of opinion here, but I disagree with this. IMHO, a person generally only needs life insurance when they are earning money and have dependents that depend on this income and will suffer financial harm if the insured person dies.*
Hearing you talk about purchasing a $100K life insurance policy for life on an 11 year old makes about as much sense to me as purchasing car insurance for someone who doesn’t own a car (but might buy one someday).
*With a few exceptions. I actually got a relatively small term policy on our then-11-year-old son because: (1) it was included with my term policy; (2) it was very cheap; and (3) if, heaven forbid, anything were to ever to happen to him, I figured the policy would cover the cost of the funeral and possibly some of the loss of income if my wife and I were unable to work for a time afterwards due to grief.
If you look at life insurance as an investment, yes. It’s not great. But it’s not an investment. The money isn’t there to give the kid something to live off of, it’s there to make sure he has money to pass on when he dies. The woman in question figured he could take care of his own term insurance and he would probably get some income replacement insurance through work at some point. But she never took care of permanent life insurance for herself when she was younger and now regrets it.
The woman in question already had an investment account for the kid and had for years. She wanted a life insurance policy. I don’t like kid policies personally, but I was simply trying to illustrate that the dollars paid in would never equal the dollar paid out. You guys want to move the goalposts I’ll do my best to keep up.
OK, but you still haven’t answered the question, “Why?”
Why does an 11-year kid, with no income and no dependents, need money to pass on when he dies? And if that is the goal (for whatever reason), why not simply invest the money on his behalf instead? You’d get a far better return from investing the money than you will from the death benefit, as Tired and Cranky notes. You could even buy a term insurance policy for the kid in the interim (while the investments build up), and you’d still likely come ahead. (And now we’ve come full circle right back to “buy term and invest the difference.”)
For that matter, why is the grandmother regretting not buying permanent insurance when she was younger? Does she currently even need life insurance, and does she need it for the rest of her life? She’s obviously got money, since she has been able to fund an investment account for the grandson for years, and now wants to pay for a whole life policy for the kid.
Ultimately it comes down to (IMHO) the insurance industry convincing people that they should have life insurance policies for their whole lives up until the point they die of old age because of…reasons.
Other than a bunch of handwaving nonsense, NAF1138, I have yet to hear a good reason why a person would actually need life insurance for their entire life (including the times in their life when they don’t have any dependents and/or are retired, and including extreme old age).
Serious question here…what goalposts are being moved?
I didn’t move the goalposts. You said that the kid needed whole life insurance so he’d never have to worry about getting life insurance again. NAF1138, you said:
I noted that he will still have to worry about life insurance for himself despite this policy because $100k in coverage is inadequate for most people who actually need life insurance. Burying a kid is cheaper than raising one. If the parents could afford to raise a kid, they can afford to bury him, so parents don’t really need burial insurance. If Grandma set aside $30 per month for ten years, he’d have about $5,000 to cover his burial expenses by the time he is 21, so he doesn’t need burial insurance. When the kid develops some adult responsibilities, i.e. kids or a wife to support, $100k isn’t going to cover those needs, so he will still need term life insurance. Grandma’s plan has failed.
I’m pointing out that the exact payment stream for Grandma’s whole life insurance can actually provide both a greater death benefit and a significant retirement income stream, if it is managed well. That is, this kid should buy term life insurance for the years that he needs it and he should otherwise invest all the money he is not spending on whole life insurance into investments that can provide both retirement income for him and an estate he can pass to his children. Nothing you have said in this thread refutes that conclusion.
In some fantasy world, you can invest 25 dollars a month for 20 years, heck, invest 6000 in a lump and at the end you will have a trivial amount of money compared to the actual cost of college. You seem to be missing how little money we are talking about. The only reason the insurance is so cheap is 1) the insured won’t die for decades, and 2) the insurance company can put the 6000 in a pile with all the other 6000s and get several million, enough to get a decent return on the money. 6000 by itself is going to get swallowed in fees, etc. Plus you aren’t allowing for taxes on a mutual fund.
NAF1138, I’m more curious whether the policy has dividends that might pay for beer money down the road.
Yes, it earns dividends at a non guaranteed rate of about 4%.
As to why he needed it? Honestly he probably doesn’t. That wasn’t the question I was addressing. I was addressing if the policy would pay more out than was paid in. His grandmother wanted it, which is an entirely different conversation.
4% of what? How does the insurance company determine the amount of the dividend?
The insurance company made the policy available and you sold it, right?
And, perhaps you missed my question in my previous post. I’ll ask again: What is the cost of insurance in a Whole Life policy and what is the rate of return on the additional deposit that is required to maintain a level premium for life?
Years ago, I was told, “You don’t buy life insurance. You rent it.”
That said, I do have two whole life policies, purchased back in the day when it was still considered an investment. One was purchased by me when I wasn’t old enough to know better; however, 35 years later, I really don’t mind writing that $211 check every year, because it’s accumulating cash value at a rate considerably greater than that (I sure did when I was in college and it was enough to put a squeeze on my budget) and the other one, purchased by my parents at about the same time, does the same thing.
My parents bought them in the early 1980s, when my sibs and I were teenagers, and didn’t tell us about them for 21 years, when the policies “matured.” I’m guessing they did this on the assumption that they would have a whole boatload of grandchildren by now, which didn’t happen. Anyway, my sister cashed hers in and I kept mine; IDK what my brother, the father of the only grandkids, did with his. I suspect he kept it because he found out that cashing it in would create a big hit on his taxes, although he did say, “How long would $25,000 last my wife and kids if I die?” (Longer than not having 25K, I guess.)
Actually, you can invest $25 per month in this world and pay exceedingly little in fees. Open up an account here: https://www.stockpile.com/ Then, invest in a low-cost diversified ETF, such as the iShares Core S&P 500 (0.04% annual expense ratio) and reinvest the dividends. You will pay $0.99 per month for each $25 investment. Stockpile does the dividend reinvestments for free. There are no other account fees.
If you aren’t investing because you don’t think you have enough money to begin, you are probably wrong.
For what it’s worth, I reran the projection I did below with some tweaks. I used the same 8% annualized rate of return but backing out the investment fees, the account still reaches $100,000 by the time the kid is 57. My first projection assumed annual investments with each payment of $300 made at the end of the year. The new projection uses monthly investments of $25, with a 7.72% simple rate of return compounded monthly to 8.000%), and $0.99 brokerage fee for each of the 240 monthly investments. I waved away the tax implications by assuming this is in a Roth IRA. The kid should be so lucky as to be outside the income range for contributing to a Roth at any point between 11 and 30 years of age.
You are right that $25 per month isn’t enough to save for college. If you start investing $25 per month the day the kid is born, you only wind up with about $11,300 by the time he turns 18. You have only $10,300 if you invest $6,000 in a lump sum when he’s 11.
Anyway, my sister cashed hers in and I kept mine; IDK what my brother, the father of the only grandkids, did with his. I suspect he kept it because he found out that cashing it in would create a big hit on his taxes, although he did say, “How long would $25,000 last my wife and kids if I die?” (Longer than not having 25K, I guess.)